Alex Brummer: King looks to the heavens

Now that he is comfortably ensconced on Threadneedle Street until June 2013, Mervyn King is increasingly feisty in public testimony. Instead of the usual calm that public servants provide for MPs on such occasions the governor feels free to use the occasion to chastise colleagues at the Bank and Whitehall with whom he may disagree.

Fellow Monetary Policy Committee member, the independent David Blanchflower, used the platform of the Treasury Select Committee to repeat his belief that British unemployment could soon be rising by more than 60,000 a month.

A few moments later he was slapped down by the governor who retorted that he did not have the benefit of 'the Almighty' telling him what the jobless figures would be.

The public divergence between the Governor and a member of the interest rate setting Monetary Policy Committee suggests that the next meeting in October could be most entertaining.

King, who rightly has taken a dim view of the behaviour of foolish bankers throughout the credit crunch, still appears to hold hard-line views on the wisdom of bailing out Britain's mortgage market. While King accepted the need for the Special Liquidity Scheme to be replaced by something similar when it closes on October 21, he wants the next model to be less lavish. He regards the current system, under which banks can swap mortgage-backed securities for cash, as 'exceptionally generous'.

Mervyn King: The BoE has ruled out an extension to its emergency funding scheme for ailing banks

This will hardly endear King to the lenders who have been calling for an even more generous scheme under which the Bank will accept new mortgages - as well as pre-2007 paper - in return for liquidity.

He also made it clear that while he understood why US authorities stepped in and saved Fannie Mae and Freddie Mac from extinction, he would be less than enthusiastic about anything similar here.

None of this is likely to please No10 either. It was thought to be reluctant to re-appoint King but felt it had little alternative during the worst financial crisis since the Great Depression. Of course under the new arrangements being proposed by the Treasury the Governor will not necessarily be primus inter pares when it comes to banking supervision.

There will be a financial stability panel of the Court, the Bank's nonexecutive directors, overseeing the banking system and a new deputy governor, possibly with great City experience, bending King's ear.

So it is possible that King may find it harder to rattle the cages so hard in the future.

Weekend nasties

The 'horrible surprise' on David Blanchflower's transatlantic radar could come more quickly than anyone expected. Wall Street looked less than willing in latest trading to give Lehman Brothers chief Richard Fuld the time he needs to dismantle the investment house in an orderly way and return it to its roots as a tame bond trading firm.

The jitters returned to Lehman almost as soon as dealings commenced in New York, spreading to the rest of the financial sector. At one stage the shares were 50% off before staging a minor rally.

The reality is that at the current value of less than £2bn the firm's equity is dwarfed by the value of the assets it is trying to sell and more importantly the size of its huge book of toxic debt.

The big joke in the US at the beginning of this week, after the rescue of Fannie Mae and Freddie Mac, was that it would be nice if Hank Paulson, the American Treasury Secretary, could take a weekend off.

This follows the preference for the US authorities to organise bailouts in marathon weekend sessions, unveiling the results of their work in time for the opening of the Asian market.

If Lehman survives until the weekend, without finding a buyer for the whole caboodle, then it could be another of those nightmare breaks for Paulson and the Federal Reserve chairman Ben Bernanke.

The markets have an instinct for smelling out vulnerability and have decided that Lehman Brothers and Washington Mutual are the weakest links in the financial chain. Survival as independent firms looks less likely by the day.

Ethical vacuum

In these days of financial turmoil we could at least hope that the purer than pure, highly ethical Co- operative Bank would offer some shelter from the storm. But not a bit of it. While the bank continued to lecture competitors on its 'social responsibility', the accounts tell a slightly different story.

Like its greedy competitors it has been required to make a hefty write-down of 'structured investments' of £25m.